Analysis of positive and negative externalities in Kuwait's public and private sectors

In delineation, externalities are the indirect effects of consumption, production, and investment decisions of people, households, and firms, which have an impact of people regardless of how minimal they are (Helbling, 2012). These indirect effects are some of the key reasons why governments often intervene in the economic realm. A great deal of these externalities are encompassed in technical externalities, which are the indirect effects that have an influence on the consumption and production prospects of other individuals, however the prices of the goods or services do not take these externalities into consideration. Consequently, there are dissimilarities and variances between private returns or costs and the returns or costs to society (Helbling, 2012). This paper will discuss both positive and negative externalities using examples of both externalities from the activities of public and private sector organizations operating in Kuwait.

Positive Externalities and Negative Externalities

Positive externalities take into account the variance between private and social gains. In this case, the private returns generated are smaller in comparison to social returns. On the other hand, negative externalities take into account the decisions based solely on the direct cost of, profit opportunity from production, and does not take into account the indirect costs of those harmed by the action (Helbling, 2012).

One of the main positive externalities perceived in Kuwait is oil wealth, in which the social gains generated are greater compared to private gains. Kuwait's accomplishment is that it has, on the whole, employed its oil revenue to make available a high standard of living for complete Kuwaiti citizens, whereas to a much lesser magnitude also profiting non-Kuwaitis. The wealth generated from oil has been responsible for the transformation of Kuwait from a desert expanse into a contemporary city-state (El-Katiri et al., 2011). In particular, the oil wealth has generated a comparatively democratic economy centered on a comprehensive system of distribution that provides the citizens of Kuwait with basic services that consist of free healthcare, education, and social security. Considering this, the positive externality is that the oil wealth of Kuwait is that it is successfully utilized to benefit its residents (El-Katiri et al., 2011).

Nevertheless, at the same time, there has developed a negative externality. In accordance to El-Katiri et al. (2011), the policies of rent distribution established and implemented by Kuwait have advanced in an unplanned and extemporized way into an ungainly system with considerable misrepresentations, falsifications, inadequacies and institutional insufficiencies. These constitute of the long-standing employment of subsidies to energy and other utilities that give rise to wasteful use and misallocation of resources. Another aspect encompassed is a largely segmented labor market whose capability to engage a great deal of young Kuwaitis outside the public sector continues to be undecided and open to question. What is more, it behoves a business setting that is uncompetitive and weakening and one that discourages private and foreign investment (El-Katiri et al., 2011).

Since the economy of Kuwait is developing and advancing, the positive externality that has benefitted the citizens is proven by the development of major roads. In addition, with Kuwait having one of the highest Gross Domestic Product (GDP) and the lowest fuel price and amount provides an idyllic chance for ownership of motorized vehicles for the citizens (Al-Bassam and Khan, 2004). With growth in the number of vehicles owned has come the increase in fuel consumption. However, these benefits have also given rise to some associated problems for the populations of Kuwait. For instance, the increase in the number of motor vehicles within the state has been a key source of urban air pollution, which is a severe health problem for the public and thereby, also responsible for hundreds of millions of dollars incurred in healthcare and welfare expenses (Al-Bassam and Khan, 2004). Another externality has been the increase in congestion within the city causing traffic problems, limiting ease in movement and increasing the level of pollution (Al-Bassam and Khan, 2004). What is more, air quality in Kuwait is adversely impacted from burning fossil fuel in power plants, traffic, oil undertakings, and petroleum processing plants.

Conclusion

This paper discusses externalities, which can be classified as being both positive and negative. On one hand, positive externalities benefit the general public while on the other hand, negative externalities have an adverse impact on the public, while also positively benefiting the private sector more than the public. Kuwait has developed into a modern city-state and has efficaciously been able to utilize its oil revenues to enhance the living standards of its residents and populations., The citizens of Kuwait have enjoyed the benefits of the oil wealth considerably. Some of the positive externalities consist of free healthcare, education, and social security. Whereas several benefits are directed at the full citizens of Kuwait, the oil wealth has also been appealing to numerous immigrants that have benefited and profited from the employment opportunities created. However, there are negative externalities that have come about. The rent distribution system is purposed to make certain that all Kuwaitis benefit from oil rents. However, some of the channels of distribution, for instance, subsidizing utilities are degenerating in nature in the manner that wealthy households have a tendency of benefiting comparatively more in comparison to poor households from these subsidies, which is a negative externality (El-Katiri et al., 2011).

References

Al-Bassam, E., & Khan, A. (2004). Air pollution and road traffic in Kuwait. WIT Transactions on The Built Environment, 75.

El-Katiri, L., Fattouh, B., & Segal, P. (2011). Anatomy of an oil-based welfare state: Rent distribution in Kuwait. London School of Economics.

Helbling, T. (2012). Externalities: Prices Do Not Capture All Costs. International Monetary Fund. Retrieved from: http://www.imf.org/external/pubs/ft/fandd/basics/external.htm